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Lack of transformation is as big a threat as Covid-19

Economic transformation is on a perpetual go-slow and the coronavirus may bring it to a screeching halt, warns B-BBEE Commissioner.
Unemployed men queue for food outside a church in Johannesburg. If the spend on skills development is affected due to lower profits and insufficient revenue given the lockdown, there'd be no/less training for unemployed graduates, youth and black people in general. Image: Naashon Zalk/Bloomberg News

At the best of times economic participation of black people hinges on the whims of a resistant business class.

The latest National Status and Trends on Broad-Based Black Economic Empowerment (B-BBEE) report produced by the B-BBEE Commission again illustrates this transformation apathy. The report indicates that black ownership regressed from 32% in 2016 to 25% in 2018, that only 2% of the JSE is 100% black owned, and black management control of enterprises is stagnant at around 38%.

Now Covid-19 threatens to heap further destruction upon our fragile transformation environment. There is a need for urgent and sustainable interventions to mitigate the potential of Covid-19 to wipe out the nominal gains made over the last 26 years.

The aim of this article is to shed light on the worst-case scenarios for black business during this pandemic and more importantly spur us into action.

Black businesses shrink in size as turnover falls

The B-BBEE Codes of Good Practice categorise enterprises based on annual turnover for purposes of measurement for B-BBEE, with Exempted Micro Enterprises (EME) being those at R10 million and below and qualifying small enterprises (QSEs) being those at above R10 million and up to R50 million.

Some of these enterprises will not survive Covid-19, while some will shed jobs. The expected decrease in turnover for many enterprises would see a decrease in the number of large enterprises (above R50 million) who will become QSEs and the knock-on effect for some QSEs being reduced to EMEs.

Consequently, as EMEs exit, so the biggest contributor to black business participation in the economy diminishes and subsequently the potential to grow and be competitive.

Overall, the number of measured entities reduce, which also impacts available contributions towards B-BBEE.

Enterprise and supplier development (ESD) tanks

The advent of Covid-19 and slowed economic activity is expected to affect revenue and profit and, with constrained financial resources, enterprises will reprioritise their budgets.

For those enterprises that have reduced B-BBEE to a box-ticking exercise, spending on B-BBEE will likely to be sacrificed where deemed non-strategic or non-essential.

Supply contracts with black EMEs and QSEs stand to be cancelled, which is a threat to the sustainability of these enterprises that rely on supplier development from large enterprises. The black-owned suppliers may be forced to exit the market, leaving monopolies to thrive in already concentrated markets.

The same principle holds for enterprise development (ED) which requires enterprises to provide key and needed financial and non-financial support to black entrepreneurs who have business ideas, but need support to develop their ideas and operate a sustainable business.

The economic pinch also means the opportunity for new ED arrangements and support for black entrepreneurs is likely to diminish in 2020 and beyond.

Skills development funds cut and more unemployment

The recent unemployment statistics by Statistics SA showed a more-than 28% unemployment rate, with the majority being black people, and youth accounting for more than 50%. If 90% of the jobs are expected to come from small, medium and micro enterprises (SMMEs) as envisaged in the National Development Plan, this will be affected, as more jobs are expected to be shed.

Part of the challenges about employment has been a shortage of skills for the economy. The skills development element of the B-BBEE codes requires enterprises to spend 6% of payroll on skilling their employees and those outside their employ. This includes contributions towards bursaries and the YES initiative introduced last year.

Read: Ramaphosa talks tough on youth unemployment crisis

Again, the percentage and actual rand value of spend towards skills development may be affected due to lower profits, insufficient revenue to stay afloat, and having to reprioritise spend. The effect would be no or less training for unemployed graduates, youth and black people in general, as wage bills get reduced.

Company B-BBEE contribution levels plummet

The 2019 national status and trends report showed about 60% of enterprises achieved a B-BBEE level of 1-4, an increase from the 40% in the 2018 report. If contributions and initiatives are reduced, enterprises face a lower B-BBEE performance rating and some would be downgraded a level in respect of each priority element they fail to achieve. This may also occur if enterprises decide not to proceed with some of the ownership transactions they were implementing this year.

With less ESD activity, skills development and ownership, downgrading is more than likely, resulting in enterprises losing their licences or contracts with organs of state if they lose their compliance status.

Section 10 of the B-BBEE Act makes it mandatory for all organs of state and public entities to consider the Codes for qualification criteria for procurement, licences, incentives and grants, among others.

A non-compliant status may trigger withdrawal or cancellation processes or disqualify enterprises for new applications.

Increase in defaults on B-BBEE loans

The Major B-BBEE Analysis Report 2017 – 2018 showed the grand total value of the 272 registered major B-BBEE transactions under the period of the report (June 2017 to 31 March 2018) was R188,745 billion. Of these transactions, about 35% were vendor financed, 19% financed by banks and 1.5% financed by government. Only about 21% of the transactions are said to be cash-based, but that does not mean unencumbered, as there is no requirement to disclose the source of the cash.

This funding model means that most equity acquisitions by black people are financed by the private sector itself on its terms, with black people being indebted to the private sector sellers.

Typically, the structure of the B-BBEE deals includes provision that dividends will be used to repay the loan advanced for the acquisition of shares, more often notional loans. Some enterprises will not be able to declare any dividends under the current conditions. The lack of dividend flow will affect the repayment of the loans account and lead to compounded interest and or extended repayment terms, which will affect net value realisation. This means black shareholders will continue to be over-indebted with no hope of settling the loan in the agreed term, thus threatening the ability to ultimately own the shares.

Most financing agreements include a default provision that the shares will revert to the seller if there is a default in loan repayment; provisions may be invoked to the detriment of black shareholders. We expect that some deals will hold while others would require restructuring or refinancing, which may impact black shareholders even further by increasing capital and or interest owed.

Major B-BBEE transactions put on ice or cancelled

In 2017-2018, 272 major B-BBEE transactions were filed, and 95 in 2018-2019, and over 100 expected in 2019-2020. With Covid-19, not only are transactions delayed due to the lockdown period, but the conclusion of some intended for 2020 will be halted or affected negatively, reducing the opportunity of acquisitions by black people.

With the economic slow-down, there is a possibility for reduced numbers of B-BBEE transactions and consolidations and mergers. The dilution of black shareholding will lead to a regression in ownership by black people. The pace of economic transformation would be retarded, which will further prolong disparities and inequality.

The way forward

There needs to be a careful consideration on the size, nature and duration of the financial interventions made available to support black businesses in this period – this means all black businesses, not only black SMMEs. The interventions required include grants, incentives, and other non-financial support necessary to sustain these businesses.

Preferential procurement should be enhanced in this period to continue to advance adherence to B-BBEE. Relaxing these rules will leave the majority of black suppliers and entrepreneurs out of the value chains.

This is also the time to encourage strategic empowerment partnerships between [black-owned] and [white-owned] enterprises for available support to benefit an inclusive economy. Bona fide discussions, re-negotiations and collective strategic decision-making between or among partners is advisable.

An increase in government funding made available to black business and entrepreneurs will also go a long way, given that only 1.5% of the B-BBEE deals filed in 2017/2018 were funded by government or government entities. To increase the impact, partnerships between public and private sector funding institutions may be more beneficial seeing, that more than 50% of the B-BBEE deals are either bank-funded or vendor financed. The funding in this case should extend to start-up capital and basic support required by new entrants and black entrepreneurs currently making use of ESD support.

Covid-19 should not be seen as an opportunity to create a “no rule” dispensation but rather an opportunity to encourage better coordination between public and private sector to transform the economy to be inclusive.

Zodwa Ntuli is the B-BBEE Commissioner

COMMENTS   38

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Its time for people to become job creators, not job takers. There will be no transformation as long as it is someone else’s problem to sort out.

Do not remove BEE. It has removed the skill,expertise and knowledge from the Communists and in so doing created entrepreneurs amongst the minority

The more they apply it, the more do the SMME’s benefit

The skill and knowledge is used far better amongst those who make it work, out of Governments hands and into the hands of the people!

BEE, another blunder by the ANC, much like the aid lacking to minority owned SMME’s who employ ANC voters, same who will be out of jobs thanks to the creative thinking of “The Council”

To punish the SMME’s is to punish your own

Our country is now run by “The Council”

Long live creative minds, entrepreneurs and SMME’s

BBEEE or whatever was born dead. Now Covid19 is making it more dead. It is like SAA, it will never fly unless it is artificially cropped up.

..born dead should be stillborn like ANC

At last an article packed with good news!

I am not going to read the article.

Its simple.

BBBEE is just a vehicle for ANC elite and connected cadres to steal. It has been proven time and time again.

The supply chain of all SOE’s and most big companies are littered with useless products of poor quality and affordable prices just to “Facilitate” transformation. No transformation involved. Just plain theft and they all share the spoils.

Brothers sisters uncles etc. with nothing to offer are employed.

Lack of transformation is a problem but the ANC and BBBEE will never fix it. NEVER.

Good. Time for this drain on the economy to be completely abandoned. Let’s hope all of these type of “businesses” (which are actually not businesses but charity cases) go the way of the dodo.

“At the best of times economic participation of black people hinges on the whims of a resistant business class” – what an utterly stupid remark! Spewing forth such fallacies completely undermines your credibility.

To get this economy going again throw BBBEE in the trash.

BBBEE is an additional 15-20% taxation in my experience that largely benefits a connected group of individuals. The real spend on skills (from preschool through to internships) should form 75% of this additional “tax”, 20% to social support for older individuals with the 5% going to charitable organisations. We have to educate our way out of this mess instead of trying to gift most of the value to those who have a political connection.

I agree that education is the only that we can include a larger portion of the population into the skilled labour market. I do believe that an important part of equation is the curriculum that is not equivalent to international standards. Why can we not adopt international curriculums so that students have easier access to tertiary institutions? Although I believe history is an important subject, I do not believe it should be a graded subject.

Truth is that economic participation of black people hinges on the whims of a kleptocratic ABCclass that steals the future’s of their countrymen, turns a blind eye to irregularities and is resistant to implement the essence of true broad based participation instead just going foe excessively concentrated ownership.

There is virtually no such thing as BBBEE. Just BEE.

Just change it to EE and make it broad based and allow all who need empowerment to benefit based on means test.

You have got my vote if you want to stand for president.

The author should explain why black ownership is going backwards. If it was going right, why is it going wrong now? Or is it just BEE schemes unwinding or failing?

Why are the MW moderators withholding my valid comment? Are we not allowed to demonstrate our right of free speech, why even have a comment section?! Oh right we have to stay “in-line” with your narrative

Same happening with my comments.

Seems like Moneyweb has been captured. So much for critical thinking…

Had the same problem yesterday. Some ‘Cleva’ people at moneyweb contraining viewpoints.

For a Commissioner, this guy surely has a very rudimentary idea of how business works. I’m tempted to write the many words it will take to point out all the mistakes in logic that were made in the article, but I’ve decided to stick to the following general comments: BEE is a policy that the ANC developed and introduced. If it doesn’t work, it is their fault (and it’s not because they don’t enforce it strictly enough or because WMC didn’t try; it’s because their plan is plain wrong and done for the wrong reasons). If you need proof, just do a quick calculation of the money that was spend on BEE over 25 years, where the transformed business went bust. I know I spend a considerable amount with zero return. This is never considered when business and WMC are once again blamed for doing nothing. Fact is, you can’t keep on pumping money into a concept that is not, and will never, work. It is also extremely demoralizing and counterproductive when Blacks are constantly reminded that they can’t start up and run their own businesses. It is also wrong, proven by the many, many businesses that are successfully run by Blacks. They don’t need WMC to help, help and help again. What they need is a government that understands that they, with their idiotic policies (just look at labour laws) must get out of the way. What they need is the political elite to stop thinking only about their own ‘transformation’. The citizens need to look at their own demand attitude and stop waiting for handouts and a leg up. They have proven they can do it, if they get off their backsides – and they will find support when they show that they are serious about achieving success.

And Moneyweb banned m comment again.

All because I dared to be critical of the extent of adipose tissue of the ANC womens league members being a health risk as large as alchohol or cigarettes!

Same happening to me.

Factual and true comments are not being allowed if they contradict the nonsense published here…

Same with me

Sadly some opinions scratch the surface of the truth more than the censor feels comfortable to allow. Never mind , the truth remains the truth.

There is a crack in everything – that’s where the light comes in –
Leonard Cohen

Same here, I will truncate my comment as follows:

I wonder what the IMF thinks about this article?

It’s telling that this is being brought up in the same breath as a parasitic plague that only detracts, and adds nothing

The people who started SA’s large organisations (that today employ many people of colour) took many risks to start their businesses from scratch (for example PnP & Shoprite). By dint of hard work and business acumen, they have risen to success. The same principles need to apply across the board – there’s no point in simply trying to leech on other people’s success. Instead all people need to work hard to start their own businesses. In short, we need more Richard Maponyas, Basetsana Kumalos, and Khanyi Dhlomos in South Africa.

I have a few commercial properties with the tenant mix as follows: 40% White South Africans and 60% non-South African people of colour.

The 60% non Saffas are legally in SA, do very well financially, astute businessmen that work very hard,very long hours every day and the rent is on time even in lockdown. I have huge respect for them and consider them as friends.
My Zim gardener explained it best: When we receive R100 we know we must use it very wisely to forward ourselves. When a Saffa receives it they just spend, because government must look after them.
That is the essence of it all!

Inclusive growth is very important for everyone of all racial groups. It shouldn’t be viewed as a threat however in an economy which isn’t growth but rather becoming more indebted, how can transformation work at all? Every racial group is struggling, and corporates are finding themselves in an environment where they need to cut costs.

To successfully implement inclusive growth, the economy needs to grow. Help corporates with an environment that is conducive to allowing them to contribute positively to transformation. This is something that is seldom spoken about.

Why do we have BEE? It is much easier to force companies to employ a certain group of people than to start their own business from scratch. No planning, no risks, no sleepless nights. Lekker in the new better rainbow nation.

Lol. Firstly I must question the figures regarding black ownership. Around 4% of the population is white. There are no formal job opportunities for the white male for many years now. Few in government, local authorities, banks etc. The list goes on and on. This country is governed by black people for many a year and they are totally in charge. The problem is poor economic policies, mismanagement and the allowing of corruption. Start realising your economic future is in your hands. As it has been for years. The poor me syndrome have no place here. The success is yours and the failures as well. Buckle up and start working om your legacy.

You cannot help men permanently by doing for them what they could and should do for themselves. Abraham Lincoln

Banging on again about transformation.

The ANC top dogs were very quick to jump in with their own RET. From 1994 they steadily stripped all the big successful well rum SOE’s. SAA, Eskom etc.

It went to a select few, now they trying to keep the votes by targeting the small fry, ie the small private companies that pay tax etc. These small picking will also go into their pockets, not the poor rural voter.

Enough RET you were the first to start, RET just a name for grand theft.

Ag shame. Well, it was the ANC after all that decided to decimate the economy to fight covid-19.

So hard luck guys.

Many may disagree but this obsession with transformation needs to stop. Transformation has morphed into nothing more than organized racism against minorities, a divisive program that is dividing citizens and the country and a massive distraction from the essential work done. In my industry there has been massive, astonishing progress in terms of transformation of 2 decades yet I cannot find any Black people capable of acknowledging it. A wonderful story no one wants to tell. Unbelievable. You get the feeling transformation is only complete to some when there are minorities in sight and everyone is sitting around wondering what happened to their jobs.

It’s either transformation or recovery. Take your pick, genius. I know, I know – he’ll pick transformation…

Yiddish proverb: A stone thrown into the well by a fool cannot be retrieved by 50 wise men.

i am deeply said to say that BEE and B-BBEE, with very few exceptions, has been the death of this economy. i don’t believe your statement that 26 years after the end of apartheid: “At the best of times economic participation of black people hinges on the whims of a resistant business class.”

rather it is the very existence of your Commission and related legislation that has re-instituted a form of apartheid — and we all know how exclusionary and stupid that was — that chokes any hope of economic growth. No one, particularly the rest of the world, will play ball, and pretty soon we will stand alone. The Indians and Chinese (and even the Russians, all Brics members) will invest solely on commercial grounds. Bolsonaro in Brazil is just laughing. The world has changed dramatically and more so with Covid-19. And B-BBEE and the Commission, however well intentioned, only holds back economic empowerment and creates new inequalities.

Perhaps B-BBEE is the problem. It’s made the candidates of it lazy. Most very well off white people I know have been “retrenched” on it’s behalf or could never be hired on it’s behalf. They, out of necessity have started their own companies. From ICT, security, finance, gardening, household repairs etc. They don’t rely on government or corporate handouts. But nevertheless have made themselves extremely wealthy. Though they’ll never get onto the JSE.

End of comments.

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